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Horse Breeder Materially Participated

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The
Tax Court held that a taxpayer materially participated in his
horse-breeding activity for 2002 through 2004 and therefore
was not barred from deducting his losses as passive activity
losses under Sec. 469 (Tolin, T.C. Memo. 2014-65).
Although the case involved horse-breeding activities, the IRS
did not seek to disallow the losses under Sec. 183 by arguing
that the taxpayer lacked a profit motive.

Stefan
Tolin, a lawyer, owned a thoroughbred race horse that was
badly injured early in its racing career. He continued to
practice law in Minnesota while he pursued horse-breeding
activities. For the years at issue, all of Tolin’s breeding
activities were conducted in Louisiana, where he moved his
horse after researching the state’s racing business and
finding that the state had horse-racing incentives that
increased the possible purses awarded to horses that sire
winning racehorses.

Tolin boarded his horse at a stable
in Louisiana, and he spent many hours on the phone with the
owner of the stable and others in Louisiana promoting his
horse’s services as a stud. He also made several trips to
Louisiana where, testimony established, he did nothing but
horse business. He proved his participation by presenting a
narrative summary of his activities, as well as testimony from
the people with whom he dealt in the Louisiana horse-racing
world. His activities were further substantiated by phone
records and credit card receipts.

Tolin reported the
results of his horse-breeding activity on Schedule C,
Profit or Loss from a Business, for the years at
issue. He took deductions for various expenses including
advertising, board and care for the horse, insurance, various
fees, veterinary expenses, and travel, and claimed losses from
the horse-breeding activities in each year. The IRS disallowed
the losses as passive activity losses.

At trial, the
IRS did not raise the issue of whether the activities were
operated with a profit motive or whether the expenses were
ordinary and necessary, so the court deemed the IRS to have
conceded those issues. Therefore, the only issue was whether
the horse-breeding activity was a passive activity. Looking at
this record, the Tax Court found that Tolin satisfied the
material participation requirement in Temp. Regs. Sec.
1.469-5T(a) by participating in the activity for more than 500
hours each year. The IRS objected to the testimony and records
used to prove the 500 hours of participation, objecting as
well to the court’s permitting Tolin to include administrative
work he did in reaching the 500 hours. But the court found
that Tolin was involved in the day-to-day management of the
activity and therefore was allowed to include administrative
tasks in the calculation. Accordingly, Tolin met the
more-than-500-hour test to prove material participation, the
activity was therefore not passive, and he was allowed to
deduct his losses in full.

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